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DETERMINANTS OF CREDIT DEFAULT SWAP SPREADS: A REGIME-SHIFTING APPROACH

Hewavitharana, Dilan and Rahmqvist, Johan (2011)
Department of Business Administration
Abstract
This thesis investigates the theoretical determinants of the credit default swap spread by employing a regime-shifting approach. The variables that are examined are leverage, stock return, volatility and interest rate. A sample of 47 companies was selected with daily mid-market quotes between Jan 2008-Dec 2010 in order to proxy the CDS spread. The research was conducted with the use of a linear regression analysis and the Markov Switching model. The results indicate problems with parameter stability justifying the implementation of the Markov model. We discover a positive relationship between the interest rate and the spread, insignificance of implied volatility and a mean-reverting behavior of the spread.
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author
Hewavitharana, Dilan and Rahmqvist, Johan
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
credit default swap, markov switching model, principal component, determinants, regime, spread, Management of enterprises, Företagsledning, management
language
Swedish
id
2156759
date added to LUP
2011-06-01
date last changed
2012-04-02 18:52:07
@misc{2156759,
  abstract     = {This thesis investigates the theoretical determinants of the credit default swap spread by employing a regime-shifting approach. The variables that are examined are leverage, stock return, volatility and interest rate. A sample of 47 companies was selected with daily mid-market quotes between Jan 2008-Dec 2010 in order to proxy the CDS spread. The research was conducted with the use of a linear regression analysis and the Markov Switching model. The results indicate problems with parameter stability justifying the implementation of the Markov model. We discover a positive relationship between the interest rate and the spread, insignificance of implied volatility and a mean-reverting behavior of the spread.},
  author       = {Hewavitharana, Dilan and Rahmqvist, Johan},
  keyword      = {credit default swap,markov switching model,principal component,determinants,regime,spread,Management of enterprises,Företagsledning, management},
  language     = {swe},
  note         = {Student Paper},
  title        = {DETERMINANTS OF CREDIT DEFAULT SWAP SPREADS: A REGIME-SHIFTING APPROACH},
  year         = {2011},
}